Cement Glut, a Real Threat or Dismissible Hoax

Crusoe Osagie takes a look at the tempestuous battle for the heart of the cement business in Nigeria between Dangote Cement Plc and Ibeto Cement Company Limited, alongside claims and counter-claims of a glut in the cement industry

The ongoing battle for the soul of the cement market is not a new-fangled development in the Nigerian business milieu. It only appears to have attained fever pitch in the last few weeks and the actors in the war who are perceptive should know by now that the crisis has snow balled into a looming disaster that could consume many when it explodes.

The imminent questions begging for answers in the current phase of a war that has spanned through a decade or so is: Do we actually have a glut in the nation’s cement market? Another issue that this report will try to address is the fear of the emergence of a cartel in the cement industry that acts as the invisible hand, which fixes the price of the essential commodity.
Manufacturers’ Glut Claims

Lafarge Cement WAPCO Plc, shortly after Dangote Cement Plc made a similar claim, raised the flag last week over what it described as the “ongoing glut” in the nation’s cement market, which it said was a threat to the continued operations of their factories across the country.

The plant manager of Lafarge’s Ewekoro (Two) Cement Plant located in Ewekoro, Ogun State, Mr. Lanre Opakunle said the various Lafarge factories had excess cement and clicker inventory at their plants amounting to about 300,000 metric tonnes, which could not be absorbed by the Nigerian market because it was already over supplied.
Opakunle said the assumption that a glut in the cement market would always result in a decline in the price of the commodity was not correct, stressing that the manufacture of cement carries huge fixed costs, which companies that have invested billions must bear.

According to him, some of these fixed costs include the wage bill for employees that must be paid whether or not local product has been displaced in the market by subsidised imported cement.
Also complaining of the same problem recently, the management of Dangote Cement Plc said it had to temporarily close down its four million metric tonnes per annum Gboko plant as a result of glut in the cement market.

The Group Head, Corporate Communication, Dangote Group, Anthony Chiejina, who confirmed the development said the move was necessitated by the glut in the market arising from the success currently being recorded with the exponential increase in local production of cement and further compounded by continued importation of subsidised cement into the country.

He disclosed that the production figure for the first 11 months of the year showed increased local production levels with supply now surpassing demand. Total supply of cement to the market at the end of November, according to him, when compared to the same period last year, has shown a record increase of 11.4 per cent, the highest ever.
He said it was therefore disheartening to note that despite the glut in the local cement market, cement importation, though reduced, has continued, thus calling to question the rigorous implementation of the backward integration policy introduced to encourage local production.

Explaining the choice of BCC for temporary shutdown, the Dangote Group image-maker said: “With the dumping of subsidised imported cement in the south eastern market, there is no way our Gboko Cement plant can survive. In fact, members of staff have been put on forced leave pending when the situation improves.
“Inventory of finished products is beginning to build up at our plants. Don’t forget that projects from our investment of about N280 billion in additional capacity are already on stream, with lines three and four at Ibese and line four at Obajana, coming on stream early this year.”

Chiejina said other manufacturers were also experiencing the same problem of low sales and high inventories and called for urgent solutions to the situation.
Also, buttressing Chiejina’s point, the President of Dangote Group, Alhaji Aliko Dangote, said the cement glut is real because of the expansion projects embarked upon by manufacturers in recent years.

Speaking to THISDAY last weekend, Dangote said in the South-west market alone, “our group brought on stream 6.5 million metric tonnes per annum at Ibese in 2012. Also, in the same year, Lafarge brought on stream another 2 million metric tonnes per annum at its new plant in Ogun State. That is 8.5 million tonnes of new capacity. This is 8.5 million metric tonnes per annum in a market (South-west) that actually needs 3.5 million metric tonnes per annum.”

He said that in an ideal situation, Dangote Cement and Lafarge should be able to export excess capacity to Benin Republic and other neighbouring West African countries, but those countries have imposed all sorts of restrictions on cement imports from Nigeria, making it uncompetitive.
“Our government is in talks with the Minister of Trade in Benin Republic over this issue because when they were exporting cement into Nigeria, we did not impose similar restrictions because of the ECOWAS treaty on trade. So we hope that this can be resolved quickly,” he explained.

Dangote also provided clarity on costs in the industry, explaining, “Our costs our fixed, irrespective of how much we produce. We incur the same cost to produce 1,000 bags of cement or 1 million bags. So even if we had to export to our neighbour, we would still have to discount our cement due to the high fixed costs incurred in the course of production in Nigeria.”
On the claim made by Ibeto Cement Company that it controls less than 5 per cent of the market in the South-east and should not pose a threat to local manufacturers in the region, Dangote said the nature of cement importation is such that the product is dumped in the country.

“Cement export is like a dumping process. Imported clinker is actually cement without 3.5 per cent gypsum, so it is much cheaper than cement manufactured locally. This means that by the time an importer is dumping cheap clinkers in the country, he makes it impossible for local producers who have invested heavily in Nigeria to compete,” he added.
Ibeto Faults Manufacturers

Responding to allegation made by the Dangote Group that the nation’s cement market had been flooded with imported products, resulting in a glut, the Ibeto Group stated that there was no way the volume of cement which it imports can induce any form of surplus.
According to Ibeto Group, a glut is an economic phenomenon that results when a market is excessively supplied with a particular product and the first evidence of such a situation is the drastic reduction in the price of the product and this has not been seen in the case of cement, which is still more exorbitant in Nigeria than any other nation in the world.

The group, in a statement signed by its Executive Director of Strategy and Public Affairs Dr. Ben Aghazu, noted that through a consent judgment entered by the Federal High Court to settle the dispute between the Federal Government and Ibeto Cement Company Limited, Ibeto Cement was currently the only authorised importer of bulk cement in the country.

Explaining how the consent judgment came about, Aghazu said the Federal Government had issued a guarantee to Ibeto Cement that the company’s proposed cement bagging plant in Bundu Ama, near Port Harcourt, shall operate for a minimum period of ten years from commissioning so as to meet the strict funding requirements of lending institutions.

The Federal Government had also encouraged the company with appropriate incentives such as reduced duty on imported equipment and a waiver of Value Added Tax (VAT).
“However, in September 2005, a mere three months after our gleaming new plant began operation, the cement cartel led by Dangote Cement used its reach in the Federal Government to unjustifiably and inexplicably closed down the operation of the Ibeto bagging plant.”

He said after various appeals to the Federal Government failed, the company went to court in 2006 to seek justice and the dispute was finally settled out of court after extensive negotiations involving all relevant federal ministries and agencies.
“In the judgment order, the Federal Government acknowledged that the Ibeto Cement Company bagging plant was unjustifiably closed down. The government also acknowledged the enormous losses suffered by Ibeto Cement Company from the unjustified closure from 2005 to October 2007.”

Part of the judgment order stated that Ibeto Cement shall be allowed to import 1.5 million tones of bulk cement per annum for the period October 1 2007 through September 30, 2017, in line with the Federal Government guarantee conveyed in the Ministry of Industry letters of June 5, 2002 and November 29, 2002.

With this judgment making Ibeto Group the sole importer of cement into the country for the specified period, the company argued that 1.5 million tonnes, which is less than 5 percent of the annual cement supply to the Nigerian market, could not create a glut.
Aghazu accused Dangote Group of trying to influence the Federal Government to invalidate the essence of the court order that authorised Ibeto Cement to import this small amount of cement until September 30, 2017, by raising the duty and other taxes on imported cement so as to make the imported cement more expensive than Dangote cement.
“We do not believe that the Federal Government should be misled into doing this because doing so will go against the spirit of the out-of-court settlement between the Federal Government and Ibeto Cement, especially since Ibeto Cement as stated, is currently the sole importer of cement.”

Referring to Dangote Group’s monopolistic tendencies, Aghazu said based on published reports, Dangote Group occupies the first position in market share of several essential commodities.
“The latest figure indicates that the Dangote Group still maintains the first position in each of these commodities: now controlling about 93 percent of the sugar market, 86 percent of cement, 73 percent of flour, 74 percent of pasta, and 89 percent of salt.”
The company stated further that in order to reduce the adverse effects of monopolies, for safety reasons, and in the interest of the common good, “some countries have and enforce antitrust laws that control how much of any strategic market an individual or corporation is allowed to control.

“Unfortunately, in our country, the antitrust laws probably don’t exist or aren’t enforced when it pertains to the Dangote Group, which holds a monopolistic stranglehold on several significant and strategic sectors of the economy.
“For example, the President of the Dangote Group, Alhaji Aliko Dangote, is also the President of the Nigerian Stock Exchange, where his companies control some 35 percent of the total stock value of the exchange. This situation ought to be very troubling to all knowledgeable and patriotic Nigerians.”

According to Aghazu, the assertion by Ibeto Cement in its statement regarding the dangerous effect of monopolies deserves serious study by our economic planners. “Do we have any antitrust laws in our books? If so, what do they say? If we do not have such laws, why not? Knowledgeable groups like the Nigerian Bar Association, Nigerian Economic Society, Nigeria Institute of Directors, Securities and Exchange Commission and members of the National Assembly should address their minds on the long-range effects of monopolistic operations on our economy and our national security. Let us have a healthy debate on this issue.”
Absence of Anti-Trust and Competition Law

Investigations by THISDAY revealed that a bill on antitrust and competition was sent to the National Assembly by the Bureau of Public Enterprises (BPE) in 2000, which never saw the light of day, because some big wigs in the country moved against it.
Being a reform agency, the BPE had at the time presented an executive bill that will establish the Anti-Trust and Competition Commission to create a level playing field for operators in markets segments and protect consumers from anti-competitive tendencies.

It was spurred into drafting bill due to the planned privatisation of NITEL and NEPA and was guarding against the creation of private sector monopolies from public sector institutions. Had the bill been passed and the commission established, it would have been the responsibility of the Anti-Trust and Competition Commission to investigate the claims and counter-claims between Dangote and Lafarge, on the one hand, and Ibeto Cement, on the other.
More importantly, such a commission would have moved to protect consumers to ensure that they get the best deal possible from market participants, be they importers or manufacturers.

Market Assessment
The price of cement in the Nigerian market has held steady for the past 24 months, hovering between N1,750 and N2,000 a THISDAY market survey carried out last week revealed.

The outcome of this survey cast doubts over the assertion by manufacturers that there is a glut in the local cement market.
The survey, which was carried out in the various parts of the country showed that from Northern Nigeria to South-south, East and West, the price of cement has been significantly stable up till last week.
Using the fundamental principles of economics, which states that when the supply of a product outstrips demand for that product, its price is most likely to decline, side-by-side with the findings of the market survey, it appears that the price of cement has not declined in response to the alleged glut.

However, manufacturers have faulted this deduction, explaining that all products do not respond to excessive supply in the same way. According to Executive Secretary of Cement Manufacturers Association of Nigeria (CMAN) Mr. James Salako, producing cement in Nigeria has some major fixed costs built into it that cannot be waived due to market forces.
“How can you produce an item at a certain cost and then sell the product at less than the cost of production? It is not possible. Instead of continuing to produce just to sell below cost price, then what you have to do is to shut down your factory, which is what our members are being forced to do now,” Salako insisted.

However, what manufacturers have declined to reveal, is the ex-factory cost of a bag of cement, in which all the fixed and variable costs will provide clarity as to whether the cost of producing a bag of cement is more expensive than imported bulk cement.
Nonetheless, the market assessment showed that in the South-south zone states of Edo, Delta and Rivers, the price of cement in the past two months has been oscillated between N1,700 and N1,800 and this price range is equivalent to the price of the product in the past 24 months, showing that the price has not been affected by the glut in the market that is being alleged.

Some of the South-eastern states like Enugu and Imo, according to the survey, had the cheapest cement with a bag selling for about N1,650 the lowest among all the states surveyed.
In the North Central states, particularly the Federal Capital Territory, cement distributors and retailers interviewed stated that the slight sluggishness in sales being experienced at the moment was seasonal when construction and building activities decline because of the holiday season.

Government Mediates
Owing to the mounting discontent in the cement market, the Federal Ministry of Trade and Investment has moved to mediate in the battle between Dangote and Lafarge, on one side, and Ibeto Cement, on the other.
THISDAY investigations at the weekend revealed that the minister, Mr. Olusegun Aganga, reached out to the two warring parties and invited them to a meeting in Abuja yesterday, with the objective of helping both parties resolve their issues, in order to protect the significant progress so far made in the cement industry through the federal government’s backward integration programme.

A source at the ministry, who confirmed the move to contain the situation, told THISDAY that government was assessing the claims and counter-claims and was making all necessary efforts to get to the bottom of the matter.
“An independent review team was set up before the Christmas break to assess the situation with a view to tackling the issue objectively.”

The ministry source disclosed that the verification team comprises members drawn from the Ministry of Trade and Investment and the Office of the Chief Economic Adviser to the President (CEAP).
The source revealed that the minister had already met with Dangote and Lafarge and has spoken to BUA and Ibeto as part of the steps to iron out the issues.
“But he will meet with main actors in the cement industry to iron out the claims and counter-claims and then chart the best course forward in the interest of the Nigerian economy as well as Nigerians.”

All said, the Nigerian public now awaits the result of the review panel set up by Aganga to resolve the imbroglio that has elicited both controversial and severe responses from Nigerians. Consumers of cement and the entire Nigerian people eagerly look forward to answers to the two most sensitive questions that have plagued their minds in the course of this war and they are: The reality of the glut and whether a price-fixing cartel that manipulates the price of this essential product actually exists.

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